U.S. bonds rallied late this week after the expected Fed increase of .25% on short term overnight lending rates. It is important to make the distinction between short-term and longer-term interest rates. While the Fed can control short-term interest rates and to a much lesser extent, longer term interest rates, the ultimate driver of longer term interest rates is the market and the expectations on inflation, employment and economic growth. With inflation non-existent and an anemic world economy barely in recovery, we are not surprised to see interest yields decline in the face of this Fed rate hike. The smart money was well aware of the high probability of this rate hike and adjusted to it well before the normal citizen.

The stock market is having another volatile week which benefits the safe haven of the bond markets. With monetary policy so complicated given the various opaque stimulus initiatives having been constructed by the U.S., European, Japanese and Chinese policymakers, we continue to be biased toward locking in loan programs when the rates look attractive.

U.S. bonds yields rallied hard today (yields and price move inversely) on falling oil prices and concerns over high-yield debt especially within the energy sector. Overall, the stock market had a tough week with both the Dow Jones Industrial average and S&P 500 closing down over 3% for the week.

Surprisingly, bonds rallied into inflationary news that was reported this morning. Wholesale inflation was higher and rose at the fastest pace since June. Even the almost certainty of a December rate hike by the Federal Reserves did not deter bonds. U.S. 10-year Treasury yield closed the week at 2.148%

A quick thought on oil: Oil closed at $35.36/barrel this week. Most of us never thought we would see oil under $60 per barrel in our lifetimes; the current price is remarkable. While putting an average of $350 in each consumers’ pocket this year, the low price of oil is troubling because oil is used in so many of our businesses from manufacturing to product development to transportation. The key question to ask is: What is $35 oil telling us? Obviously, the market is concerned.

With so much negativity in the air, we are biased toward floating interest rates at this time.

Friday’s rally was a welcomed relief for U.S. equities and a better than fair day for U.S. bonds after a tough week for both stocks and bonds. The November Employment Report released early Friday confirmed that the U.S. economy is still recovering with 211,000 new jobs created in November. With the employment coming in above expectations, a Fed rate hike later this month is all but certain. What the Fed does after the initial lift off from zero is anyone’s guess, but be prepared for a ¼% raise in the overnight rates later this month. The smart money has already factored this pricing in so the adjustment in the marketplace should be muted when the Fed actually announces the rate hike.

A rough sell-off mid-week is a good reminder that with rates still at historical lows, locking in your loan is a very prudent practice in the current market. However, with bonds trading well today, we are biased toward cautiously floating interest rates into next week.

Our thoughts are with the city of Paris.

U.S. mortgage rates remained range-bound with the 10-year U.S. Treasury trading down to 2.24% Friday morning from 2.30% earlier in the week. Friday was “a no-activity day” with respect to economic reporting.

However, the Federal Open Market Committee released its minutes this week which eased the stock markets. The consensus is that even if the Fed raises interest rates, they will do so very gingerly. Further placing a ceiling on U.S. interest rates was dovish commentary out of the European Central Bank (ECB). More stimulus could be coming to help boost inflation.

At the moment, we are carefully biased toward floating interest rates given the recent rise in rates in the U.S., as well as considering the economic and geopolitical events surrounding the globe.

U.S. bonds are trading better Friday morning after several bond-friendly economic reports and an ongoing decline in the world stock markets this past week. Heavy on traders’ minds is the decline in oil and other commodities which is a deflationary signal. Each and every week we attempt to make sense of the markets, but the data is so mixed, it remains quite challenging.   

From a short-term rate increase standpoint, many feel that the Federal Reserve will raise short-term interest rates in December, even though there is still no sign of inflation (as evidenced by this morning’s Producer Price Index (PPI) report) simply because the Fed indicated it would do so in its last meeting. This is creating even further confusion as inflation and wage growth are non-existent, the Fed’s dual mandates behind raising interest rates continues to be argued by both dissenters and supporters. Some are saying that the low interest rates are causing deflation and that by raising rates, inflation would follow. We will leave that argument to the experts. 

Therefore, based on today’s deflationary reports, we are biased toward floating interest rates very carefully into next week’s widely followed Consumer Price Index (CPI) report.

U.S. bonds are having a tough end to a bad week. With chatter growing throughout the week about a December rate hike, the spectacular October jobs report has made a December rate hike feel like almost a done deal. The October payrolls grew by 271,000, well more than expectations of 185,000. The unemployment rate fell one-tenth to 5%, and the closely watched employment participation rate (U6) fell to 9.8%.

U.S. Treasuries are getting clobbered Friday morning with the 10-year treasury yielding 2.30%, and the 2-year treasury spiking to .91%, a level not seen since May 2010.

With adjustable rate mortgages (ARM) still very attractive and fixed rate mortgages still near 4%, we are strongly biased toward locking in interest rates.

U.S. bonds had a tough week with the 10-year U.S. treasury trading up to 2.18% after the Federal Open Market Committee (FOMC) comments on Wednesday.

Commentary from FOMC did not rule out a rate hike this December. In its policy statement, the FOMC reiterated its dual mandate of full employment and 2% percent inflation as a continued theme in the decision to raise short term interest rates. The comments suggested that continued modest increases in employment could tip the Fed to raise rates. No one knows for sure, but trading suggested a stronger bias toward a December 2015 rate hike after the FOMC comments were released.

While U.S. policy makers continue to discuss rate hikes the rest of the world continues to ponder how to use monetary tools to stimulate their economies. How this will play out is anyone’s guess.

With so many diverging policy making decisions being presented on a global scale, we are watching the market closely and are very cautiously floating interest rates at this time.

U.S. bonds sold off this week in response to another positive week in the world stock markets. The U.S. stock market experienced an excellent week of trading as global central banks (minus the United States) are all utilizing quantitative easing policy tools in response to their slowing economies and deflationary fears. Both China and Europe are lowering interest rates. China surprised the market Friday morning with an interest rate cut. This has pushed money out of the safe haven status of U.S. bonds into riskier assets such as equities and has increased bond yields.

While a Fed funds increase is off the table for October and maybe for the rest of the year, it will be interesting to see how U.S. bonds trade as other countries pump their economies with new “QE” while the U.S. moves away from these stimulus policies. As written previously, the world economic issues remain highly complex and deciding where rates will trend is a tough call.

However, with U.S. bonds still trading a tad over 2%, we are biased toward locking in interest rates at these levels.

This week was light on economic reports. While last week’s job report was a boon to bonds and provided a lot of commentary on whether the Fed would raise short term interest rates, this week’s release of the Fed’s minutes, which were dovish in nature, sent stocks on a bit of a run at the expense of bonds. The Fed minutes verified policy makers concerns about a global economic slow-down, as well as their indecision about raising short term interest rates. Where we go from here is anyone’s guess, but a 2015 rise in short-term interest rates seems to be off the table for now.

Mortgage rates feel a bit stuck at the moment, but each week can bring new surprises. However, with mortgage bonds near various support levels, we are biased toward locking in rates.